Granting of a loan by husband to wife does not amount to transfer of asset to make it taxable under the Wealth Tax Act, rules the Income Tax Appellate Tribunal

The Income Tax Appellate Tribunal, Bench at Mumbai on Wednesday, reversed an order of the Commissioner of Income Tax (Appeals) to add Rs 2.28 crore to Bollywood actor Mr. Shah Rukh Khan’s (assessee) net wealth being the amount he had lent his wife as interest free loan to buy flat and jewellery.

 

Bollywood actor, Shah Rukh Khan

Mr. Khan’s wife Gauri had used Rs 1.65 crore of amount loaned to her to buy a house in Delhi and Rs 63 lakh for jewellery. The Commissioner of Income Tax (Appeals) had ordered adding the amount to Mr Khan's net wealth for assessment year 2005-06 on the ground that it amounted to transfer of assets.

It was against the said order of assessment that Mr. Khan preferred an appeal to the Mumbai Bench of the Income Tax Appellate Tribunal

The Mumbai bench of ITAT held on Wednesday that the Commissioner of Wealth Tax (Appeals) was not justified in confirming the addition of Rs 2.28 crore to the actor's net wealth and had erred in holding that the house and jewellery purchased by his wife was an indirect transfer of assets.

Income tax authorities had held that the loan advanced by Shah Rukh Khan was an indirect transfer of assets by the assessee to his wife. Accordingly, the loan amount of Rs 2.28 crore was added to the net wealth of Rs 2.75 crore declared by the actor for assessment year 2005-06.

Mr. Khan’s contention was that that he had extended a loan to his wife which cannot be said to be a transfer of assets. Counsel appearing for Mr. Shah Rukh Khan cited a judgment of the Karnataka High Court to support his argument that the loan given by Mr. Khan to his wife was recorded in the books of account and cannot be treated as transfer of assets from husband to wife.

Income Tax Department on the other hand argued that the loan amounted to indirect transfer of assets within the meaning of section 4(1)(a)(i) of the Wealth Tax Act.

The ITAT, Bench at Mumbai however, held that extending a loan to wife does not fall within the definition of 'Asset' under the provisions of the Wealth Tax Act and therefore it cannot be said that there was a transfer of asset from husband to wife as argued by the Income Tax authorities.

"We are not agreeing with the Assessing Officer since there is no 'transfer of asset' by the assessee rather an asset has been purchased in the form of a residential house after taking an interest free cash loan from the assessee. In our view, there is no transfer of asset by the assessee, as has been canvassed by IT Counsel and also held by IT Assessing Officer and IT Commissioner (Appeals)," ITAT members D Karunakara Rao and Joginder Singh ruled.

Wealth Tax is levied at one per cent on the net wealth (of an assessee) exceeding Rs 30 lakhs in a year. Net Wealth includes residential houses (with one house getting exemption) and jewellery.